Cineverse Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our historical Condensed Consolidated Financial Statements and the related notes included elsewhere in this report. This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “estimates,” and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Business Overview Cineverse Corp. (“Cineverse”, “us”, “our”, "we", and “Company” refers to Cineverse Corp. and its subsidiaries unless the context otherwise requires) was incorporated in Delaware on March 31, 2000. The Company has a long legacy in using technology to transform the entertainment industry and played a pioneering role in transitioning movie screens from traditional analog film prints to digital distribution. Over the past several years, Cineverse has transformed itself from being a digital cinema equipment and physical content distributor to a leading independent streaming company. Cineverse is a streaming technology and entertainment company with its core business operating as (i) a portfolio of owned and operated streaming channels with enthusiast fan bases; (ii) a large-scale global aggregator and full-service distributor of feature films and television programs; and (iii) a proprietary technology software-as-a-service platform for over-the-top (“OTT”) app development and content distribution through subscription video on demand ("SVOD"), dedicated ad-supported video on demand ("AVOD"), ad-supported streaming linear ("FAST") channels, social video streaming services, and audio podcasts. Our streaming channels reach audiences in several distinct ways: direct-to-consumer, through these major application platforms, and through third-party distributors of content on platforms. The Company’s streaming technology platform, known as Matchpoint™ , is a software-based streaming operating platform which provides clients with AVOD, SVOD, transactional video on demand ("TVOD") and linear capabilities, automates the distribution of content, and features a robust data analytics platform. We distribute products for major brands such as Hallmark, ITV, Nelvana, ZDF, Konami, NFL and Highlander, as well as international and domestic content creators, movie producers, television producers and other short-form digital content producers. We collaborate with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to Apple iTunes, Amazon Prime, Netflix, Hulu, Xbox, Pluto, and Tubi, as well as (ii) physical goods, including DVD and Blu-ray Discs. Financial Condition and Liquidity As of June 30, 2025, the Company has an accumulated deficit of $504.6 million and a working capital deficit of $(0.3) million. For the three months ended June 30, 2025, the Company had a net loss attributable to the Company's common stock, par value $0.001 per share (the "Common Stock") holders of $3.6 million. Net cash used in operating activities for the three months ended June 30, 2025 was $14.5 million, which included $1.2 million of incremental investment in our content portfolio via advances or minimum guarantee payouts. We may continue to generate net losses for the foreseeable future. Subsequent to June 30, 2025, 1.9 million warrants were exercised for net proceeds of $5.8 million. The Company is party to a Loan, Guaranty, and Security Agreement, as amended on April 8, 2025, with East West Bank (the "Line of Credit Facility") providing for borrowings of up to $12.5 million and expandable to $15.0 million, guaranteed by substantially all of our material subsidiaries and secured by substantially all of our and our subsidiaries’ assets. The Line of 23 Credit Facility bears interest at a rate equal to 1.25% above the prime rate, equal to 8.75% as of June 30, 2025. The Line of Credit Facility matures on April 8, 2028. As of June 30, 2025, $3.6 million was outstanding on the Line of Credit Facility. The Company will continue to invest in content development and acquisitions, from which it believes it will obtain an appropriate return on its investment. As of June 30 and March 31, 2025, short-term content advances were $5.2 million and $6.7 million, respectively, and content advances, net of current portion, were $5.9 million and $4.1 million, respectively. Our capital requirements will depend on many factors, and we may need to use existing capital resources and/or undertake equity or debt offerings, if necessary and opportunistically available, for further capital needs. We believe our cash and cash equivalents and availability under our Line of Credit Facility as of June 30, 2025 will be sufficient to support our operations for at least twelve months from the filing of this report. Critical Accounting Estimates Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our Condensed Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies , of the Notes to the Condensed Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements (Unaudited) , of this Quarterly Report on Form 10-Q. Management believes that these policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. Results of Operations for the Three Months Ended June 30, 2025 and 2024 (Unaudited) (in thousands): Revenue For the Three Months Ended June 30, As a % of Revenue 2025 2024 $ Change % Change 2025 2024 Streaming and digital $ 9,104 $ 7,703 $ 1,401 18 % 82 % 84 % Podcast and other 989 1,043 (54 ) (5 )% 9 % 11 % Base distribution 1,024 351 673 192 % 9 % 4 % Other and non-recurring 2 30 (28 ) (93 )% — % — % Total Revenue $ 11,119 $ 9,127 $ 1,992 22 % 100 % 100 % For the three months ended June 30, 2025, total revenue increased by $2.0 million, or 22%, as compared to the three months ended June 30, 2024. Streaming and digital revenue for the three months ended June 30, 2025 increased by $1.4 million, primarily driven by an increase of $0.5 million in subscriber revenue, $0.5 million in transaction revenue related to Terrifier 3 and $0.4 million of barter revenue. The Company's $0.7 million increase in Base distribution revenue for the three months ended June 30, 2025 as compared to the three months ended June 30, 2024 was primarily driven by increased physical sales related to the DVD release for Terrifier 3. Direct Operating Expenses For the Three Months Ended June 30, As a % of Revenue 2025 2024 $ Change % Change 2025 2024 Direct operating expenses $ 4,807 $ 4,479 $ 328 7 % 43 % 49 % 24 The $0.3 million increase in Direct operating expenses for the three months ended June 30, 2025 was primarily driven by increased variable costs associated with the increase in revenue compared to the prior year quarter, primarily royalty and participation expenses and manufacturing, freight, and fulfillment charges. Selling, General and Administrative Expenses For the Three Months Ended June 30, As a % of Revenue 2025 2024 $ Change % Change 2025 2024 Compensation expense $ 5,129 $ 4,051 $ 1,078 27 % 46 % 44 % Corporate expenses 1,196 1,012 184 18 % 11 % 11 % Share-based compensation 418 470 (52 ) (11 )% 4 % 5 % Other operating expenses 2,209 1,030 1,179 114 % 20 % 11 % Selling, General and Administrative $ 8,952 $ 6,563 $ 2,389 36 % 81 % 72 % Selling, general and administrative expenses for the three months ended June 30, 2025 increased by $2.4 million compared to the prior year quarter. Compared to the three months ended June 30, 2024, compensation expense increased by $1.1 million due to increased headcount and other operating expenses increased $1.2 million primarily driven by increased marketing and legal costs associated with our increased theatrical offerings this year. Depreciation and Amortization Expense For the Three Months Ended June 30, As a % of Revenue 2025 2024 $ Change % Change 2025 2024 Amortization of intangible assets $ 957 $ 709 $ 248 35 % 9 % 8 % Depreciation of property and equipment 105 154 (49 ) (32 )% 1 % 2 % Depreciation and Amortization $ 1,062 $ 863 $ 199 23 % 10 % 9 % Depreciation and amortization expense increased $0.2 million compared to the prior year quarter primarily due to internally developed software assets being placed into service. Interest expense, net For the three months ended June 30, 2025, interest expense decreased by $0.7 million to $(0.3) million compared to the prior year quarter. The decrease is primarily the result of a lower average balance on the Line of Credit Facility during the quarter compared to the prior year quarter and a $0.4 million discount to accrued interest provided by the Terrifier 3 lender in return for an expedited final payment. Adjusted EBITDA We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items. Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe Adjusted EBITDA will also be useful to others, including our stockholders, as a valuable financial metric. We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net income (loss) from continuing operations as an indicator of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance. 25 We believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net income (loss) from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to net income (loss) from operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP. Following is the reconciliation of our consolidated net (loss) income to Adjusted EBITDA (in thousands): For the Three Months Ended June 30, 2025 2024 Net loss $ (3,516 ) $ (3,050 ) Add Back: Income tax expense 14 7 Depreciation and amortization (1) 1,147 948 Interest (income) expense (278 ) 431 Stock-based compensation 418 470 Other expense (income), net 78 (166 ) Net income attributable to noncontrolling interest (44 ) (23 ) Transition-related costs (2) 47 27 Adjusted EBITDA $ (2,134 ) $ (1,356 ) (1) - Includes $85 thousand of amortization included in direct operating expenses on our Consolidated Statements of Operations for the three months ended June 30, 2025 and 2024 (2) - Primarily employee severance costs. Cash Flow Changes in our cash flows were as follows (in thousands): For the Three Months Ended June 30, 2025 2024 Net cash used in operating activities $ (14,524 ) $ (2,344 ) Net cash used in investing activities (16 ) 151 Net cash provided by financing activities 2,568 925 Net Change in Cash and Cash Equivalents $ (11,972 ) $ (1,267 ) For the three months ended June 30, 2025, net cash used in operating activities was primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization and stock-based compensation, and other changes in working capital. Specifically, the adjustments are primarily driven by net cash outflows related to content advances made to partners for which initial expenditures are generally recovered within six to twelve months and operating prepayments and a decrease in accounts payable and accrued expenses. Operating cash flows are typically seasonally lower during the first two fiscal quarters and higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season. Cash used in investing activities is primarily related to expenditures towards long-lived intangible and fixed assets. Cash provided by financing activities are primarily driven by proceeds, net of payments, on the Line of Credit Facility. For the three months ended June 30, 2024, net cash used in operating activities was primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, including capitalized content spend and other changes in working capital. Operating cash flows are typically seasonally lower 26 during the first two fiscal quarters and higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season. Off-balance sheet arrangements We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies, Basis of Presentation and Consolidation and Note 3 - Other Interests to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q, we hold a 100% equity interest in CDF2 Holdings, which is an unconsolidated variable interest entity (“VIE”), which wholly owns Cinedigm Digital Funding 2, LLC; however, we are not the primary beneficiary of the VIE. 27